New Opportunities in Emerging Markets for Wind Power

As we move into 2024, the wind energy sector is undergoing significant transformations driven by evolving technologies, quality enhancements, and novel business models. This dynamic environment mirrors the complexities seen in associated industries like photovoltaics, which have long been criticized for excessive internal competition. However, the recent push for expansion among wind companies into international markets highlights a pivotal shift in direction, one which is increasingly attracting attention.

One significant yet often overlooked aspect is that the globalization of wind energy is not solely focused on established markets in Europe and North America. Instead, there is an emerging trend where companies are actively exploring opportunities in developing regions that show burgeoning wind energy needs. These new markets include India, Central Asia, Latin America, and Africa, which, despite their perceived economic limitations, exhibit strong demands that present lucrative opportunities for wind energy firms.

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Companies that engage with these emerging markets are reaping substantial rewards. Recent quarterly performance reports from leading Chinese wind energy firms show promising improvements. For instance, Goldwind Technology saw a staggering 4,195% increase in net profit in the third quarter, reaching approximately 405 million yuan, while another player, Unida, also reported net profits exceeding 100 million yuan for the same period. While these figures might not seem impressive at a glance, within the context of the wind energy industry, such a turnaround is quite significant.

Wind energy operates on a global scale, with profits coming from diverse sources. The business model encompasses selling components, equipment, and total solutions. Notably, the key to profitability lies in the correlation between wind energy demand and market opportunities, drawing parallels to the experiences of cross-border e-commerce firms where demand dictates opportunities irrespective of regional wealth.

Taking SANY Wind Energy as an example, it is one of China's top five wind turbine manufacturers, capturing about 10% of the domestic market. While it continues to face challenges within its home market, SANY is eager to capitalize on the prospects overseas that can elevate its global standing.

Recently, the company secured a significant order for 1.6GW of turbines in India. This contract involves three subsidiaries under JSW Group, India's largest steel producer, in collaboration with the Singapore-based Sembcorp Group's Indian arm. Notably, SANY's marketing head, Guan Feng, shared that the profit margins for this order would surpass domestic margins by over five percentage points, primarily due to the comprehensive pricing structure that includes not only the turbines but also shipping, tariffs, and other associated costs.

This reverse differential in profitability has made SANY particularly proactive in expanding its overseas ambitions. Reports indicate substantial breakthroughs this year, with orders rolling in from India, Southeast Asia, the Middle East, and Europe.

Similarly, Envision Energy, the second-largest player in terms of installed capacity, has consistently maintained its position as the market leader for two consecutive years in India. A spokesperson remarked, "The profitability in the Indian market is significantly better than in China, almost by a factor of two."

Another notable advancement comes from Mingyang Smart Energy, which recently signed a collaboration agreement with the Institute for Renewable Energy Innovation in Brazil. This partnership aims to jointly develop offshore wind energy projects, focusing on supply chain, technology, and logistics.

Brazil stands as the fourth-largest market globally for wind energy, trailing only behind China, Europe, and the United States but ranking third when considering individual nations—beating out Germany and India. Brazil shares favorable relations with the Chinese market, which is a strategic advantage for firms like Mingyang.

Further emphasizing the trend, Goldwind Technology has strategically invested in Africa, and as of 2023, reports indicate that 37.1% of the company's total exports were turbines sent to that continent. Moreover, in the first nine months of this year alone, they have amassed orders amounting to nearly 2GW across Africa.

These stories of explosive orders and successes highlight not merely luck on the part of Chinese manufacturers but rather a sector that is, despite being critiqued for its internal struggles, demonstrating a global competitive edge propelled by innovation and expansion. Yet, relying solely on low pricing will not suffice to capture and maintain market shares.

Discussions surrounding Chinese manufacturing and its global output often emphasize lower costs, which is indeed a factor. However, clients in emerging markets are not naive; they recognize the value in quality and reliability, which means that merely offering competitive prices will not sway them to allow countless suppliers into their market.

While Chinese manufacturers enjoy cost advantages due to a comprehensive supply chain and notable technological advancements that continually reduce turbine costs, it’s critical to recognize that wind energy components are highly standardized. Chinese companies excel at producing various parts—such as towers, blades, and generators—that are seamlessly integrated into turbine systems.

Statistical insights reveal that China accounts for approximately 70% of the global production of turbine castings and forgings, with market shares for blades, towers, and generators ranging between 20% to 70% in overseas markets. As a result, firms like SANY and Envision, which operate across multiple supply chains, are positioned favorably within the market.

A senior executive from a leading turbine manufacturer remarked, "Our products can be priced 20% lower than European competitors when bidding for overseas projects, and we still maintain healthy profit margins." The emphasis on cost-effectiveness showcases the unassailable competitive edge of Chinese manufacturers.

Additionally, Chinese firms have adapted strategies that cultivate local supply chains and secure key projects that enhance regional ties. When local interests align, addressing potential challenges becomes significantly easier.

For example, Envision has established turbine and blade manufacturing facilities in India, generating employment for hundreds of locals. Local governments perceive these investments as beneficial, effectively categorizing these firms as local contributors, which further enhances their appeal due to potential tax benefits and shared economic interests.

In late August, Goldwind inaugurated its first overseas manufacturing facility in Brazil, located in Bahia's Camacari. With an annual production capacity of 150 wind turbines, this plant is poised to secure 25% to 30% of the Brazilian wind turbine market, signifying its critical importance to the company’s global strategy.

The success of such ventures is underpinned by strong bilateral relations between Brazil and China. Numerous state-owned enterprises—such as China General Nuclear Power and Three Gorges Corporation—have already established projects in Brazil, supported by local component suppliers like China National Building Material. These cooperative dynamics create a favorable environment for investment.

Examining SANY's initiatives in Central Asia, investment plans are already underway in Kazakhstan and Uzbekistan, where SANY is preparing to establish manufacturing facilities as part of its strategic engagement in these key regional economies.

Kazakhstan is a crucial trade partner for China while also being a significant destination for exports. Hence, SANY’s first project in the region, the Arkalyk Wind Power Project, will provide over 400 million kilowatt-hours of electricity annually, directly addressing local energy demands. Similarly, Uzbekistan is eyeing an investment of around 12 billion USD for its wind power alignment.

As we witness Chinese companies making significant inroads into emerging markets, traditional Western players seem less equipped to respond to the evolving competitive landscape, inadvertently easing pressure on Chinese firms as they expand. Research from UBS suggests that major North American and European companies are retreating from these developing markets due to insufficient manufacturing bases, leading to profit losses and issues with project deliveries.

According to the Global Wind Energy Council (GWEC), China dominates the capacity for wind turbine manufacturing, accounting for 60% of the world's production, whilst Europe holds only a 19% share. While European enterprises have historically had about 20 years of head start, the instability of their manufacturing foundations hampers their ability to sustain market share.

Recent years have been challenging, with leading Danish turbine manufacturer Vestas witnessing a significant spike in prices yet simultaneously experiencing declining profit margins. Siemens Gamesa has encountered substantial losses, specifically in the 2023 financial year, due to a lack of market adaptability and resource allocation issues.

In contrast, the competitive edge of Chinese wind power manufacturers is markedly increasing, allowing them to thrive in markets where their European counterparts are retracting. Bloomberg New Energy Finance has projected that from 2024 to 2030, Chinese wind turbine manufacturers will predominantly target developing countries where robust growth potential exists, particularly in markets across Central Asia, Southeast Asia, Africa, and South America. They anticipate that an additional 110GW of installed capacity will emerge in these regions within this timeframe.

Meanwhile, Western companies like GE and Siemens prioritize protecting their profitability by retreating to domestic markets, inadvertently providing Chinese firms with opportunities to enhance economies of scale and technological advancements.

Several factors contribute to the increasing dominance of Chinese firms in India, where engaging in the market is becoming increasingly feasible. The key driver here is the prevalence of 3MW wind turbines, a product category with which Chinese manufacturers are already well-acquainted. While these models do not carry the higher price tags of larger turbines, they still yield favorable margins for Chinese companies. In contrast, for European competitors, fulfilling smaller orders in India poses financial impracticality due to shipping costs from distant production facilities.

With the growing scale of installed capacity also comes a substantial price advantage; China's land-based wind turbine prices stand at approximately $300 per kilowatt, in comparison to over $1,000 in other parts of the world. This highlights the impact of economies of scale on competitive positioning.

Moreover, compliance with project timelines is critical in the energy sector. Therefore, the ability to provide punctual service has emerged as an indispensable criterion for success. For instance, a land-based wind energy project in Serbia initially selected a foreign provider that quoted an 18-month delivery timeline, excluding installation and testing phases. Eventually, the project stakeholders shifted gears and opted for a local contender, Unida, whose efficiency allowed for swift project realization, concluding in just three months.

These developments underscore that Chinese firms have cultivated a highly efficient and robust approach to international expansion, particularly in emerging markets, where their attributes resonate well within developing economies. An interesting historical note reveals that China’s first export of a wind turbine back in 2007 was directed towards South America, specifically Chile, defying the trend of pursuing typically more expensive markets in Europe and North America.

Reflected in statistical analyses by UBS, by 2030, Chinese wind energy companies are expected to dominate markets in the Asia-Pacific, Middle East, Africa, and Latin America, with their market share soaring from below 30% to over 60%. This growth trajectory indicates a radical transformation in global wind energy dynamics.

The journey for Chinese wind firms, particularly in markets like Brazil and India, marks nearly a decade-long effort, transitioning from concept to localized presence. As we advance, this evolution promises to escalate from 1 to 100, enabling an extensive scale of deployment.

Moreover, the lessons learned from complex international experiences—such as the 2011 EU double anti-dumping investigation into China's photovoltaic products—have armed these companies with vital knowledge on compliance and navigation through international market landscapes.

While former energy giants in Europe and North America struggle to adapt to market shifts, the growth of the wind energy sector is far from an end. The Global Wind Energy Council has forecasted the addition of 1,200GW in global wind energy capacity from 2024 to 2030, highlighting an ever-expanding marketplace. The stage is set for the elite among Chinese companies leading the charge in wind energy’s future.